Transcript Spending Money

Spending Money
How is the federal budget different than the
typical American’s?
What is fiscal policy?
How did the Congressional Budget Act of
1974 change budgeting, if at all?
Why doesn’t economic health
matter?
• The gov’t must respond not just to problems of
economic health (majoritarian), but the
demands of interest groups/voters (client
politics)
• Voters believe they can have more and less
spending at the same time!
– If there is a deficit, belief that spending is too much,
not that gov’t is taxing too little
– Yet, believe that gov’t should spend more on public
programs
– This is reflected in the budget
Making a budget
• Budget—document that announces how much the gov’t
will collect in taxes, spend in revenues, how
expenditures will be allocated among programs
– fiscal year—the year the budget covers (Oct. 1-Sept. 30);
named after year it ends
• In theory, should be based on first deciding how much
money will be spent, then allocating
– Instead, a list of everything the gov’t is going to spend money on:
not allocating, but adding up what’s being spent
– No budget at all before 1921; committees in Congress did what
they wished until about 1974 (no real oversight)
Congressional Budget Act 1974
• CBA 1974 to change this policy; prez submits a budget
in February to the two budget committees of Congress (1
H/1 S)
– Committees look at it and analysis from Congressional Budget
Office (CBO)
– Submit to their house a budget resolution—congressional
decision that states max amount gov’t should spend for the fiscal
year
– Adoption should take place in May; committees select programs
through appropriations process (summer)
• Appropriations (doling out of money) rarely make big
changes in spending
– 2/3 is mandatory spending—money goes to people who are
entitled to it (Medicare, SS, paying on bonds…)
– Loophole: nothing in the process forces Congress to
tighten the “financial belt”
– Procedures used by Congress can affect the policies adopted by
Congress
Did the Act work?
• CBA did not automatically lead to spending cuts; those
concerned about deficit try to put a cap on spending
– 1985 Balanced Budget Act (Gramm-Rudman Act) had a
provision called a sequester—automatic spending cuts across
the board on all federal programs if failure to agree on total
spending level—FAILURE
• 1990 new strategy
– Congress votes for a tax increase
– 1990 Budget Enforcement Act setting limits on discretionary
spending—spending not required by existing contracts,
entitlements, or interest on debt (1/3 of total budget)
– If more was spent on one program, that of another would be
reduced (expired 2001)
The Fed
• What are the three main parts of the Federal
Reserve?
• What are the main jobs of the federal reserve?
Be specific.
• How is monetary policy different than fiscal
policy?
• Is your local bank part of the Fed?
• Video: “In Plain English” from the St. Louis
Reserve Bank
The Federal Reserve
What is the Fed?
How does the Fed help shape the economic
conditions in the US?
How does the Fed implement monetary
policy?
What is the Federal Reserve?
• Created by the U.S. Congress in 1913
• U.S. lacked a way to study and implement
monetary policy, actions the Fed uses to
influence the amount of money and credit in the
U.S. economy
– markets often unstable, little faith in banking system
• Fed is a politically independent entity, subject to
oversight (periodical reviews) from Congress
• Headed by a government agency called the
Board of Governors of the Federal Reserve
• 12 Federal Reserve Banks in major cities are
supervised by the BOG
– act as operating arm of the central bank and do most
of the work of the Fed
– create income from four main sources:
• Services provided to banks
• Interest earned on government securities--debt obligation
(local or national) backed by the credit and taxing power of a
country with very little risk of default (bonds, bills…)
• Income from foreign currency held
• Interest on loans to depository institutions (banks)
– Income from these used to finance daily operations
like info. gathering/research. Any excess income is
funneled back into the U.S. Treasury
• The system also includes the Federal Open
Market Committee (FOMC), the policy-making
branch of the Federal Reserve.
– makes important decisions on interest rates and other
monetary policies
What does it do?
• Mandate is "to promote sustainable growth, high levels of
employment, stability of prices to help preserve the purchasing
power of the dollar and moderate long-term interest rates.”
– sound banking system, healthy economy
– serves as the banker's bank, the government's bank, the regulator of
financial institutions and nation's money manager
• Issues all coin and paper currency
– U.S. Treasury actually produces the cash, Fed Banks distributes it to
financial institutions.
– Check bills for wear, take damaged currency out of circulation
• Federal Reserve Board (FRB) has regulatory and supervisory
responsibilities over banks
– monitoring banks in the system, international banking in the U.S.,
foreign activities of member banks and the U.S. activities of foreignowned banks
– helps develop federal laws governing consumer credit
– the policeman for banking activities within the U.S. and abroad
How does it implement
monetary policy?
• Primary responsibility of the Fed is devising and implementing
monetary policy
• Changes to amount of money and credit affect interest rates—the
cost of credit—and economic performance
– if the cost of credit is reduced, more people and firms will borrow money
and the economy will grow
• The Toolbox—main tools the Fed uses to influence monetary
policy:
– Buying/selling federal gov’t securities (open-market operations)
• influences the level of reserves in the banking system
• affect the volume and the price of credit
• open market is where securities dealers compete; most frequently employed
tool
– Regulating amount of money a member bank must have in reserves
• setting reserve requirements - funds banks are required to hold in reserve
against deposits; determines how much money banks can create through
loans and investments (10%)
– Changing interest charged to banks (borrowed from Fed)
• setting the discount rate -the interest rate banks pay on short-term loans
from a Federal Reserve Bank; raise/lowering affects money banks lend